The market regulator SEBI, on 22nd April, 2020, proposed to relax the pricing norms for preferential issues by listed companies that are under financial stress. This proposition also included granting an exemption from making an open offer, if the acquisition would result in the acquiring firm to gain more than 25% voting rights in the investee company (Consultation Paper). The SEBI has now invited public comments and feedback to the Consultation Paper.

SEBI notified this proposal by adding a new regulation, i.e. Regulation 164A to the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (the ICDR), along with a sub-regulation, i.e. (2B) to the Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the SAST).

The new Regulation 164A of the ICDR pertains to the pricing in preferential issue of shares of companies having stressed assets, wherein it states that this pricing may be calculated for 2 weeks preceding the relevant date. The earlier version of this was the 26 weeks and 2 weeks formula. The new sub-clause, Regulation 10(2B) of the SAST pertains to the obligation to make an open offer of acquisition of shares or voting rights or control by way of preferential issue compliance with Regulation 164A of the ICDR, wherein it exempts the same.

It is obvious that these relaxations are subject to certain conditions. These conditions may include the issuer company and the acquirer satisfy the conditions that are set out in the relevant Amendment Regulations, in case the company undertakes a preferential issue, default for 90 days, with the credit rating downgraded to D and shares locked in for a period of 3 years.

It is further realised that SEBI would have received a few suggestions from the public over these new changes, and based on these suggestions, has even expanded the applicability of these relaxations, while at the same time, has introduced a few additional conditions.

So, additionally, two more important amendments are made to the ICDR, which were not part of the Consultation Paper, which are:

• The preferential issue corresponding to the new regulations, may not be made to a person who has executed a guarantee in favour and such guarantee has been invoked and remains unpaid; and
• The proceeds arising out of the preferential issue must not be utilised for repayment of any promoter loans.

The amendments made by SEBI are considered to be commendable, as they will be of tremendous help to companies that are facing financial stress during these tough times. These new regulations will help such companies avoid their path to insolvency.